How investment managers can fight off the threat from big tech

Will Bailey, EVP for Europe and Innovation at InvestCloud, looks at how the HNWI sector is dealing with GAFA, PSD2 and roboadvisors.

By Will Bailey

October 9, 2017 08:55 BST

A recent report found that 56.2% of high-net-worth individuals (HNWIs) would think about using one of the big four technology firms to manage their wealth if they offered investment services.

When considered against a backdrop of only just over a third of HNWIs saying they would recommend their current investment manager, the report can be viewed as "doom and gloom" for the investment management sector.

One may initially wonder, how can the industry plan to compete against the likes of Google, Amazon, Facebook or Apple (GAFA)? These are massive businesses that have cultivated brand loyalty and have vast resources to potentially throw at a new venture should they choose to branch into wealth management.

The answer is in cultivating the existing relationships wealth managers have with asset owners to transform their existing client relationships into true brand loyalty. By expanding their offerings to integrate digital experiences with the human touch, wealth managers have an opportunity to foster stronger bonds with their clients and grow brand loyalty at the same time.

With $30tn of assets in the US alone set to pass from baby boomers to their children in the next few decades, wealth managers must take significant action to hold the attention of investors while money is on the move. In particular, the younger generation is an audience accustomed to having their lives run by apps and digital services, from Instagram to Uber.

How can the sector advance and innovate to ensure it is not drowned out by the presence of big technology firms? The answer lies in going hybrid – combining digital and traditional.

D-day for digital

Digital has quickly become the watch-word in finance, particularly in retail banking, evidenced by the proliferation of chatbots and money transfer apps, just to name two relevant technologies. FinTech innovation in these areas has been spurred by regulation. Europe's Revised Directive on Payment Services (PSD2) and the push for open banking has forced banks to create open APIs and to innovate in payments. This has paved the way for new entrants into the market to offer different products to the end-consumer.

The tide of regulation has just begun to truly impact wealth management in a similar way. As MiFID II and GDPR force wealth managers to adapt to new data requirements in Europe, opportunities are made available by the introduction of new savings schemes like the Lifetime ISA (LISA) in the UK.

As consumer expectations shift, with investors expecting more digital and on-demand engagement, wealth managers have been slow to innovate. This is largely due to their reliance on legacy IT systems that require significant amounts of their budget to be dedicated to maintenance rather than innovation.

The rise of robo-advisors in the past decade has proven to be another salvo that further forces the sector towards technology innovation. By automating the investment management process, these digital startups have targeted the growing mass affluent sector. This ensures they can operate at larger scale and offer a quality experience at a lower price point than traditional players.

This has not only squeezed investment managers, but forced them to re-think strategies. While it is true that the current approval ratings for pure robo advice amongst the HWNI segment hovers around 12%, it's worth remembering it's still in its infancy. As it becomes proven, more HNWIs – particularly younger generations – will potentially flock towards it.

The human touch

This is where investment managers can combine the latest technology with their own unique selling point – human expertise.

While investment managers might be put off by the perceived popularity of large technology companies, the incumbents actually have the advantage. Investment managers have decades of experience behind their advice. This is something that the big four technology firms do not have, and wouldn't be able develop without considerable acquisitions.

But as the travel and grocery industries will submit, this does not guarantee success against such a threat. Services need to suit the needs of the customer today and tomorrow. By using the existing personal relationships they have built and incorporating a digital experience that furthers their brand and investment ethos, wealth managers can create a moat around their existing business. This future-proofs the business, allowing managers to focus on growing the customer relationship and the client base.

Hybrid means that the client experience is intuitive, involved and individual. Reports shouldn't just be sent as PDF attachments – they should be digitally interactive and personalised to the client. A hybrid approach provides a digital experience that a client can access at any time, from any place and on any device. The experience must be designed to speak to the specific client's persona and feel truly individualised.

Reality check

So, does the fact that more than half of HNWIs state that they'd prefer GAFA over their existing wealth managers provide such an existential threat to the industry? Yes and no.

No, because none of the GAFA companies have expressed any interest in offering such services. To date, they have shown their interest is in gaining investment rather than investing themselves. It may well be the robo-advisors who would suffer the most – with automated investing more likely to be targeted at the mass affluent rather than primarily focused on HNWIs.

But at the same time, it shows the threat and opportunity digital services represent to investment management. HNWIs are clearly open to the idea of receiving investing services from technology pioneers.

Digital is the new standard operating procedure for investors. Firms that invest now will future-proof their businesses against the new competition and potentially open new revenue streams by offering new products and gaining exposure to new markets.

Going hybrid will give the wealth management industry more tools to attract the next generation of investors, while improving the experience for current clients. It empowers them to engage more with their wealth and improving transparency.

In today's world, digital is no longer optional – it is now a necessity to ensure investment management's future.